Currency boards got a lift in the 90s but are few and far between nowadays.
Currency boards were au courant 20 years ago experts with expert touting them as salves for global volatility among other things. But there was a big “if.”
“If emerging market governments can successfully fix their currency exchange rates to the dollar or DM, then financial risk managers can make use of US dollar interest rate products and swap currency risk for country risk,” International Treasurer wrote in November 1994.
According to the IMF, a currency board “combines three elements: an exchange rate that is fixed to an “anchor currency,” automatic convertibility (that is, the right to exchange domestic currency at this fixed rate whenever desired), and a long-term commitment to the system, which is often set out directly in the central bank law. The main reason for countries to contemplate a currency board is to pursue a visible anti-inflationary policy.”
One proponent, Dr. Steve Hanke, professor of applied economics at The Johns Hopkins University in Baltimore, likened them, ahead of time, to a single currency bloc. “’Once you have a currency board in place,’ notes Dr. Hanke, ‘that country becomes part of a unified currency area with the reserve currency country.’ In other words, the US Federal Reserve Bank or the German Bundesbank set their monetary policy for them just as they do for California or Bavaria.”
Of course, the euro would come into being just a few years later, and countries that were pegged to the Bundesbank, like the Estonian kroon, were soon pegging themselves to the euro currency. The US, Australia, and a few other countries still have some pegged currencies – mainly nearby. But overall, in the succeeding 20 years, many countries have gone their own way (Argentina) braving the FX market elements on their own.
For the US, Hong Kong remains one of the rarities of major economies still pegged to the US dollar, but forces at work could break the peg. Last year the Bank of International Settlements reported that trade in yuan had surpassed that of Hong Kong dollar for the first time. And with China moving toward making the yuan a convertible, the HK$ will eventually migrate to the yuan.
Ultimately, while many currency boards worked, others struggled, particularly after a wave of shocks in 1998. “Economic credibility, low inflation, and lower interest rates are the immediately obvious advantages of a currency board,” the IMF wrote in 1998. “But currency boards may prove limiting, especially for countries that have weak banking systems or are prone to economic shocks.”